tealing Russia!

Privatization as it has occurred in Russia is not the same phenomenon of privatization that is occurring in the rest of the world, said Louise Shelley at a Kennan Institute lecture on 18 November 1996. Shelley, Professor at the Department of Justice, Law, and Society at the American University and former Title VIII-Supported Research Scholar, Kennan Institute, characterized the Russian privatization process as the stealing of the Russian state.

Privatization in Russia was conducted without the legal safeguards and controls present in other countries, even other formerly socialist countries. As a result, the economic wealth of the country became concentrated in a small number of hands and the workers of privatized enterprises have been cheated of their rights under Russian law. Shelley gave as an example the privatization of a typography firm with a desirable location in central Moscow. By law, the firm was supposed to have gone to the workers of the firm, but was instead acquired by a major bank that coveted its prime location. The workers sued in the courts and won, but the absence of legal enforcement mechanisms left the firm in the hands of the bank. When the workers showed up to protest, they were met with tanks.

If the privatization process is rife with illegality, Shelley stated, it was hoped that legal norms would arise afterwards to protect property that had been privatized. Instead of the emergence of legal norms, however, there has been an explosion of violence. The recent bombing of an Afghan War veterans group (whose import tax exemptions attracted organized crime groups) in a cemetery and the shooting of Paul Tatum, an American partner of the Radisson-Slavyanskaya hotel in Moscow, are but the latest examples of how violence is used to resolve disputes.

Another aspect of this theft of the Russian state, according to the speaker, is the spontaneous privatization of property by the managers of privatized enterprises. Managers, doubting the ability of their enterprises to compete in the global economy, strip the valuable assets of their firms and export or invest that wealth abroad. Workers are thus first cheated of their right to own a stake in the privatized enterprises and are then subsequently robbed of their livelihoods when these enterprises are depleted of the resources necessary to pay wages.

Illegitimate privatization in Russia has far-reaching negative implications. Unequal wealth and income distribution, lack of recourse to an effective legal system, and non-transparent privatization processes are detrimental to long-term economic development in Russia and the evolution of sound business practices in Russian firms. These factors have provided instead an economic atmosphere in which organized crime thrives.

The spread of organized crime in the Russian economy did not arrive with the post-Soviet privatization program, noted Shelley. The phenomenon dates back to Gorbachev's anti-alcohol campaign, which began during his first month in office in 1985. The Soviet state had previously derived 10% of its income from the turnover tax on the sale of alcohol--revenue which in a very short period of time was transferred to a highly professional criminal class that satisfied Russian society's demand for alcohol. This transfer of revenue coincided with Gorbachev's economic reforms introducing forms of private ownership in the economy such as joint ventures and cooperatives, providing a window of opportunity for organized crime's entry into the legitimate economy.

If organized crime is like a cancer throughout the post-Soviet states, Shelley stated, then different areas are suffering from different types of cancer. Organized crime in Russia feeds off the most profitable sector of the economy of the region in which it resides: from real estate and banking in Moscow, to natural resources and military industry in the Urals. Where there is little value in the legitimate economy such as in the Caucasus, organized crime resorts to more traditionally illicit activities such as auto theft, drugs, and arms smuggling.

Russian privatization and organized crime have created an environment which is not attractive to foreign investment. Even worse, according to the speaker, the climate is not conducive to maintaining existing capital within Russian society. Foreign investment amounts to a few billion dollars a year, Shelley explained, whereas since 1991 at least $50 billion of Russian capital have left the country. Half of this capital movement was in the form of capital flight to more secure investments abroad, half in the form of money laundering, which demonstrates how corrupt Russian banks and organized crime are heavily tied into the depletion of the Russian state.

Organized crime in Russia is distinguished by its pervasive involvement in the legitimate economy, Shelley stated. The participation of organized crime in Russia's privatization programs facilitated by the absence of legal safeguards and the failure of legal norms to emerge have resulted in the stealing of the Russian state. According to research by the Russian Ministry of the Interior, over 40,000 privatized enterprises in Russia have ties to organized crime. This figure is derived from the number of enterprises involved in criminal investigations which were halted due to political pressure. "It is a pervasive problem," Shelley concluded, "one which if you attempt to deny you are not understanding the political context in which it is occurring...neither law enforcement nor the judiciary are independent actors within the Russian state."

"Stealing the Russian State: Privatization and Organized Crime" sponsored by the Kennan Institute for Advanced Russian Studies, was presented 18 November 1996 by Louise Shelley, Professor, Department of Justice, Law, and Society, American University, and former Title VIII-Supported Research Scholar, Kennan Institute. Joseph Dresen is Program Assistant, Kennan Institute for Advanced Russian Studies.

Comments by Dr. Pytor Joannevich

One should distinguish between the Russian people and the Russian "Government"/KGB/Mafia cartel that victimizes and exploits this population. It can be argued that any effort to engage in industrial development in Russia under present conditions cannot be characterized as "investing", but rather as an activity more acurrately characterized as "funding exploitation of the population and depletion of the Russian state". Russia's GDP has fallen 48% from $1,228.54 billion in 1990 to $638 billion in mid 1996. GDP now consists largely of the export of raw materials. Participation in Russian "commerce" increasingly implies becoming an oppressor of the population.

Actual aggregate transfer of resources abroad for the period 1991-1995 was $300 billion. I project the level for 1997 at between $25-50 billion, all at the expense of the Russian population.

Purchase of securities, which constitutes most of western involvement contributes little if anything to GDP and benefits the exploiters. "Short-selling remains an excellent strategy for profiting from this chaotic pretense to a 'capital market".

There is the semblance of an economy fueled largely by Western "demilitariztion policies". At a 5% rate of growth, it requires 15 years for GDP to double. And as this growth process is not expected to set in until 1998, pre-reform GDP levels will not be attained until the year 2013. By way of comparison US per capita GDP grew from $10,892 in 1959, to $22,786 in 1994. This pertains to averages only. The average wages of the 10% of the best-paid workers in Dec of 1995 in Russia were 26 times higher than the average wages of the 10% of the worst-paid workers, and the incomes of the richest 10% of Russians were 13.1 times higher than the incomes of the poorest 10% of Russians. The implication of that inequality is that while the 'average' Russian will have regained his 1991 living standards sometime after 2013, many many millions of others will perhaps never regain it and find themselves living at levels considerably below their counterparts in South America.

Given the 57 year average life expectancy of the Russian male the entire population of males who were 36 years or older in 1991 will finish out the remainder of their entire post-reform lives at levels below those they enjoyed in 1990. However sad the above scenario, it is nonetheless overly optimistic. It is based on a rate of growth double that of the US.

As long as the depletion of the Russian State by the "policy-makers" continues, the prognosis for earning a profit and being able to retain it will remain bleak.

Dr. Pyotr Joannevich van de Waal-palms
President, Palms & Company, Inc., Investment Bankers
United States of America